Bankruptcy Short Sale

[Hasan Hamdan]

What do you say to a seller when they ask how does a short sale benefit me after I've done bankruptcy? Are there even any benefits? What I've been saying mainly is that its added protection and gets your name out of it, but it doesn't work on every seller.

[Paul Choate]

I am a bankruptcy attorney. Most of this discussion is for chapter 7s. Chapter 13 is more complex as it is generally filed to save the home. The issues in a 13 post discharge are probably not too difficult but a 13 lasts from 3-5 years. Assume I am talking about a 7 going forward. They are more common.

Bankruptcy takes away the debtor's in personam liability (legal term for liability against the person). It does not deal with the In rem (liability against the property) rights of the debtor.

Debtors can leave a bankruptcy under chapter 7 still in the house and current on their payments. They do not personally owe money on the house but it is legally their house and the lien of the mortgage holder is still valid. They have to continue paying under the terms of the note or surrender the property. This can happen any time before the loan is paid off.

The mortgage holder's only remedy is to foreclose for non payment if the debt was not reaffirmed. If it was reaffirmed, the debtor is personally liable for the debt again. There is no judgment against the debtor for personal liability after a bankruptcy discharge of the debt.

So, to your original question, what are the benefits?

1. PP stated it. No foreclosure on their credit report.

2. If they reaffirmed, they will not get personally sued.

3.  An additional issue is what are called "zombie mortgages". When the value of a property becomes a negative, some lenders will not foreclose. Nothing requires them to do so. You can have a situation where a debtor has filed bankruptcy, abandoned a home and get a tax bill or nuisance notice three or four years later.  They assumed the bank would take care of the house and the bank did not. The Debtor is still the legal owner of the property. They could be potentially liable for the debts arising post filing and not even know it.

The reality is there is little incentive for the bank to do a short sale after bankruptcy. The reason is all of the legal issues someone in bankruptcy is dealing with. The bank is taking a chance that the title will be clean in the short sale process. There is little question in a foreclosure. The bank should get good title. They have already lost the right to go after the debtor and have already spent money on legal fees.

I would love to hear of individuals who have done this successfully. There is a lot of public info in a bankruptcy filing that would allow you to target potential leads. However, I don't see the motivation for the banks.